Baishan Cloud stock not attractive enough

The company aims to become Hong Kong’s first stock offering edge cloud services, which make high-speed cloud computing from remote locations more efficient

Key Takeaways:

  • Baishan Cloud has filed for a Hong Kong IPO, reporting revenue of 2.13 billion yuan and a 190 million yuan loss in 2022
  • The edge cloud services provider’s investment in network infrastructure equaled more than 80% of its revenue during the same period 

    

By Li Shih Ta

As cloud computing continues to grow, increasingly sophisticated customers are becoming more demanding with their rapidly diversifying needs from service providers. Such users, engaged in cutting-edge technologies like 5G, the internet of things (IoT), and artificial intelligence (AI), are driving up demand for an emerging generation of “edge computing services,” which provide faster data transmission by moving computing power and offsite data closer to remote users.

One of China’s leading independent players in that space, Baishan Cloud Holdings Ltd., is hoping to become the first to bring its “edge” to Hong Kong investors, after submitting its IPO application to the Hong Kong Stock Exchange late last month. The deal counts CICC and Haitong International, two major China-focused investment banks, as its joint sponsors.

Edge cloud is a new, rapidly-progressing category of cloud infrastructure and services, aiming to boost remote computing efficiency through decentralization. While traditional cloud computing provides more centralized resources using servers located in major data centers, edge computing uses a larger number of more widely dispersed nodes to process data closer to the end user, allowing for faster information transmission and processing.

Founded in 2015, Baishan Cloud provides two main categories of services: edge cloud network services, and security and computing services. Network services mainly center on the company’s edge cloud-based networks for content, download and streaming media delivery. The company’s networks have served more than 1 billion end users.

Growing overseas business 

The company’s prospectus shows that Baishan Cloud’s revenue rose from 1.8 billion yuan ($253 million) in 2020 to 2.27 billion yuan the next year, before dipping to 2.13 billion yuan in 2022. It returned to a growth track in the first half of 2023, with its revenue up 7.9% year-on-year for the period to 1.08 billion yuan.

Despite being based in interior Guizhou province, one of China’s poorer regions, the company is rapidly expanding overseas. Contributions from overseas markets increased from 7.9% of Baishan Cloud’s revenue in 2020 to 26.2% in the first half of 2023. By the end of June last year, it had deployed more than 1,700 edge nodes in more than 300 cities in more than 50 countries and regions, with a network bandwidth of more than 80 Tbps. That rapid growth abroad has made the company the only independent Chinese edge cloud service provider with a significant overseas footprint, according to a third-party market research company cited in the prospectus.

In 2022, it acquired ChinaCache’s overseas customer network as well as its sales and marketing teams. Baishan Cloud founder and CEO Huo Tao worked in ChinaCache for a decade and became its COO in 2015, responsible for the company’s overall operations, including sales. To further develop its overseas business, Baishan Cloud established a separate EdgeNext brand last year with its own independent operations team for customer development and service. Its customers include big-time game publisher Steam.

Big infrastructure investment 

Despite its return to revenue growth and position at the cutting edge of the cloud services space, Baishan Cloud is still losing sizable money. Its annual losses were relatively constant from 2020 to 2022, ranging between 170 million yuan and 190 million yuan, though the figure narrowed to 35.9 million yuan in the first half of last year.

Its prospectus shows the company has invested heavily and incurred other expenses related to its core network infrastructure as a result of its rapid expansion. Its annual spending on bandwidth and rack leasing totaled between 1.59 billion yuan and 1.96 billion in the three years from 2020 to 2022, and was on track to reach a similar level at 870 million yuan in the first half of last year, accounting for between 80% and 90% of its total revenue each year in that period.

That heavy spending has weighed on the company’s gross margin, though the figure has risen gradually from 4.3% in 2020 to 12.7% in the first half of last year.

The company is also limited by its heavy reliance on a very small group of customers. According to the prospectus, revenue from its top five customers in 2022 accounted for 76.9% of the company’s total, with the largest customer alone accounting for 47.9%. Two of the five are also its major suppliers. 

Formidable rivals

Despite its position at the leading edge of the cloud services space, Baishan Cloud faces quite a bit of competition. It commanded about 3.1% of China’s edge cloud services market in 2022, behind such heavyweights as the country’s big three telcos, China Mobile, China Unicom and China Telecom, as well as some of the country’s other large cloud service providers. Baishan Cloud admitted it could face difficulty winning new market share in such a tough field.

That said, there’s still plenty of business to go around. China’s edge cloud market was worth 4.5 billion yuan in the first half of 2023, up 46.3% year-on-year, according to a report by data tracking firm IDC. The rapid growth is being driven by factors like internet audio and video companies speeding up construction of their traffic distribution systems, and service providers increasing the supply of edge resources to local customers.

The Global System for Mobile Communications Association (GSMA) forecasts the total number of connected IoT devices worldwide will reach 25.2 billion by 2025, which will generate huge amounts of data. Such devices and their developers will rely strongly on edge cloud services to provide more stable networks, faster data transmission and lower latency in a growing number of scenarios.

Baishan Cloud is positioning itself as an independent third party and will work together with larger centralized cloud companies, CEO Huo said in a previous interview. “The bigger the customer, the less they want to be tied to just one cloud company,” he said, adding that edge cloud “would become the next battleground in the trillion-yuan cloud computing market.”

Baishan Cloud’s relatively early arrival to edge cloud services, including its early deployment of a large number of edge nodes, will be one of its major attractions for investors, as will its fast-growing overseas business. The company will use funds from its listing to continue expanding its networks, but will also need to show investors a roadmap to sustained profitability to cash in on its early-mover advantage at the “edge” of China’s vast but also crowded cloud services market.

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